A Return to the Good Old Days

24 March 2011

Thursday

Western Europe has brought itself to such a high pitch of development in recent decades following the combined devastating effects of the Great Depression, the Spanish Civil War, the Second World War, and the looming presence of Soviet communism, that we scarcely remember the time when Portugal was the Bolivia of Europe: perpetually poor, politically unstable, and subject to a seemingly endless series of coups d’état.

Portugal’s torpor was more or less the result of the one-two punch of an early modern “resource curse” followed by the 1755 earthquake and tsunami at Lisbon. What I mean by an “early modern ‘resource curse'” was that the Portuguese economy became dependent upon income from colonies in the New World, which in the case of Portugal meant Brazil. Industry declined precipitously in Portugal itself, and the people cultivated a sense of entitlement for generations until they were largely incapable of practical effort in ordinary pursuits. (A situation much like the Persian Gulf oil sheikdoms of today.)

As I noted above, Europe has done rather well for itself, bringing along with it not only the core continental economies of France and Germany, but also economies that had historically been quite marginal: to the west — the Iberian Peninsula — and to the east — the Balkans and Central Europe. The world became so quickly accustomed to this success that the idea of a European economic union, ultimately cemented by the currency union of the Euro, seemed to have about it a certain air of inevitability, as though its success were guaranteed.

Now it seems that Portugal is about to slip again into a kind of economic torpor, consigned to a marginal position, along with Greece, in the Balkans, which had its riots and crisis some months ago. In today’s Financial Times, Portugal and Greece were both described as peripheral Eurozone countries. In The Dubious Benebits of the Eurozone I suggested that it was remarkable that there was no built-in mechanism in the formulation of the currency union to address such crises. I still find this remarkable, and it is perhaps the most telling sign of the presumption of the inevitably success of the union that no plans, or insufficient plans, were made for troubled times.

However, I also argued in Shorting the Euro that the value of the Euro is quite high, and even if the currency takes a hit, the Europeans will still be quite well off, and their economies will ultimately be sound. Except, perhaps, for the “periphery.” Marginal Europe is likely to return to its historically marginal status, so that those countries not traditionally part of the core of successful European economies will find that they have not “hitched their wagon to a star” by joining the Eurozone. Those nation-state that have traditionally been part of the core of successful European economies have demonstrated that they will not intervene in a robust manner to keep these marginal and peripheral economies on an equal footing to their own.

At this point in the recovery of the world economy, following the housing crash and the consequent financial meltdown, world economists were no doubt optimistic that growth would be hitting its stride about now. Instead, we have the earthquake and tsunami in Japan, with is attendant nuclear crisis, and social unrest throughout the Arab world, and between these natural and social disturbances expectations of slow, steadily, predictable growth must fall by the wayside.

In Portugal, austerity measures were voted down in a move that may result in an international bailout package — imagine the IMF coming to the rescue of a Eurozone nation-state, while the rest of the Eurozone looks on in complacency. But Portugal is far from isolated in this respect. Attempted austerity measures for the long-term good of the economy are notoriously unpopular, and routinely are the cause of riots and social unrest. The telos of this development is a situation like that in Argentina, when a popularly elected government attempts to practice the politics of mass subsidy — disastrously.

Indeed, the social unrest in the Arab nation-states that has been dominating the news lately has often been triggered by economic grievances. These economies have been moribund not least due to the cronyism of entrenched autocracy, and the legitimate hope is that, with the end of such autocracy and its inevitable cronyism, that there will be a democratizing effect and a spreading of the wealth. Such hopes are justified in the long term, but in the short term — and this is the scale of time represented by triggers for social unrest and revolution — they are unrealistic in the extreme. Russia now, some twenty years after the dissolution of its command economy, is doing well, but it went through some rather difficult times in its transition. The same is to be expected, at least to some degree, in regard to North Africa and the Arabian Peninsula, though greatly complicated by the oil wealth in the region.

In terms of sheer weirdness, perhaps recent moves by Utah to make gold and silver alternative currencies represent a movement of ideologically driven economic policy that, if the idea spreads, could do significant mischief. There is dissatisfaction and unrest among the wealthiest in the world, who may choose to cut off their collective noses to spite their collective faces. There is also dissatisfaction and unrest among the poorest in the world, and with the efforts to remove Muhammad Yunus from the Grameen Bank in Bangladesh that he created, it seems that economic policy is becoming politicized and polarized in ways that may give immediate emotional satisfaction at the expense of long term growth and economic viability.

I am not projecting or predicting worldwide financial disaster — I find apocalyptic scenarios distasteful in the extreme, not least when expressed in the secular terms of economics — but it does seem at the moment that the world economy is teetering on a knife edge, at which point it could fall backward into retrograde and politicized policies of the sort that exacerbated the Great Depression, and from which it might regain its sanity and move forward again by placing rationality and pragmatism of the emotional satisfaction of economic revenge.

In the grumbling hive of Mandeville’s Fable of the Bees, “every Part was full of Vice, Yet the whole Mass a Paradice,” and, “Their Crimes conspired to make ’em Great.” Great economies comprise great crimes; and great wealth means wealth often in undeserving hands. But the alternative — making everyone poor, something Mao pioneered with the Great Leap Forward and the Cultural Revolution — would leave a mark on world history from which we would not soon recover if practiced on a global scale. And this is the danger: the global economy is global, and with potentially global problems. Global efforts are needed to prevent moralistic folly from ruining what hopes we may rationally entertain.

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Note added 29 March 2011: Today on the BBC, in the story Portugal and Greece downgraded on debt worries, it was reported that Standard & Poor’s has downgraded Portuguese and Greek bonds: “The downgrades left Portugal one notch above junk rating and Greece’s creditworthiness below that of Egypt.” It seems we are well on the way to a two-tier Eurozone in which there will be a core of healthy, growing economies that more or less approximate the originally intended policy limits of Euro participation, as well as a periphery of poor cousins that use the Euro but which do not hew to Euro budgetary targets nor uphold Eurozone policies. One can see the participation of the Eurozone periphery as a kind of preemptive Euroization of marginal economies that might have needed rescue (and perhaps Euroization) by the core Eurozone nation-states at some point in time anyway. Why not put them on the Euro now instead of later? This makes northern European tourism to Greece and Portugal all that much easier by avoiding the inconvenience of currency conversion.

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Note added 05 April 2011: A new story today, Portugal downgraded by Moody’s on further debt concerns, notes that Portugal’s bonds have been downgraded again. The above-referenced story said that the previous downgrading, “left Portugal one notch above junk rating,” which means that the current downgrading puts Portuguese bonds firmly in junk bond territory. The Portuguese have receive so little in terms of support from the Eurozone that it invites the counter-factual speculation as to what would have been done in respect to Portugal had the Portuguese not been part of the Eurozone.